EUR/USD:  Sharp squeeze higher but unlikely to persist – MUFG

Analysts at MUFG Bank, noted the Euro rose across the board amid global risk aversion yesterday. They point out the scale of the move higher in EUR/USD was unusual. 

Key Quotes:

“The sharp depreciation of CNY yesterday that prompted some significant moves in EM FX has benefitted the euro. EUR/USD yesterday gained 0.86% - the largest one-day gain since 25th January. LatAm along with Asian currencies suffered notable losses and clearly there were substantial positions globally that have been funded through the euro. This makes sense of course not just given the negative yield at the short-end but more recently given the pretty explicit guidance by the ECB that it would be cutting the deposit rate again and embarking on another round of QE.”

“In little over a month, EUR/USD fell from 1.1400 to close to 1.1000. A look at leveraged and institutional EUR speculative positioning does not indicate any notable shift in what has been long-held EUR short positions and while we would expect the euro to out-perform other G10 currencies during a risk-off episode, we would not expect to see the scale of gains recorded yesterday.”

“We have argued before and shown analysis covering previous risk-off episodes that the euro does perform well. Indeed, updating that a little to cover more recent episodes – taking the risk off episodes (3% drop or more in S&P 500) since the start of 2018, the yen has been the top performer in 6 of the seven episodes; the Swiss franc has been the 2nd best performer in 5 of the seven occasions and the euro has been 3rd best performing in 5 of the seven occasions as well. And on the other two occasions the euro was 4th best performing. So, what was perhaps unusual yesterday was the scale of the move higher in EUR/USD and more recent positioning since ECB easing speculation increased may have exacerbated the move. What appears more likely is relative stability especially given the escalation in trade conflict will continue to borne out in weak/mixed economic data in the euro-zone, in particular in Germany.”